Strategic Exchange - November 2012

By Kemp Harr

Mohawk took another big step toward maintaining its edge as the largest flooring company in world when it chose to buy Pergo, the global leader in laminate flooring.

But isn’t the laminate business in a state of decline?

It’s true that laminate sales within the specialty retail sector have been hurt by the success of luxury vinyl planks, but laminate flooring is doing quite well when you consider the home centers, Lumber Liquidators, and other mass merchant retail channels. In fact, unit growth for laminate flooring in the past year is estimated to be around 10%.

Back in 1977, the Swedish company Perstorp invented laminate flooring and introduced it to the Swedish flooring market in 1984. In 1989, the company launched the Pergo brand name in Europe and in 1994 the product was brought to the U.S. For the next ten years, the company refined and patented its locking system, and embossing technology. In 2007, Pfleiderer purchased Pergo in a cash transaction estimated at $410 million. Fast forward five more years on the backside of a massive global recession and Mohawk buys Pergo for $150 million in cash. Pergo’s global sales in 2011, according the press release, were $320 million.

We did hear that two other entities—a west coast private equity firm and a suitor out of the Far East—also bid for Pergo.

When Pergo first came to the U.S., Color Tile was its first big customer and eventually it built its presence with specialty retailers—choosing to sell through distributors. The big volume break came when Home Depot started carrying Pergo in 1996. But as the home centers started promoting the Pergo brand, specialty retailers started moving to other brands. At the same time, the average net selling price for laminate flooring in the home center dropped almost a dollar to $2.49 a square foot.

The last several years have been tough on Pergo’s profitability here in North America. According to one industry insider, Pergo lost $11 million on sales of $169 million in 2010. Last year, sales grew to $193 million and earnings turned positive again to $6 million. This year, sales are over $210 million and earnings should be well over $20 million.

Mohawk first entered the laminate flooring business in 2005 when it bought Belgium based Unilin for $2.6 billion. At that time, Unilin’s global sales were right at $1 billion.

It’s easy to see the fit when you compare Mohawk’s Unilin laminate business to the soon-to-be-acquired Pergo business. There isn’t too much overlap in coverage between Quick-Step and Pergo. Here in the U.S., Pergo is strong in the home centers and Quick-Step is sold mostly through specialty retailers. From a manufacturing perspective, there could be up to $20 million worth of synergies when the two global operations are fully integrated.

This consolidation of the two largest suppliers of laminate flooring results in one company holding roughly 35% of the U.S. $1.1 billion wholesale laminate flooring market. Kronotex now holds the number two position with a share of about 15%.

My biggest concern over continued investment in laminate flooring over the long haul is two fold. First, is the trend we’re seeing toward LVT and away from laminate flooring going to continue across all retail channels as it has within the specialty retail sector? We hear Home Depot is doing very well with its Allure LVT product and Lumber Liquidators is now offering its customers a luxury vinyl plank. Secondly, will the average net selling price for laminate continue to decline as capacity outweighs demand and producers try to keep their assets running?

WILL WOOL FIBER GAIN IN MARKETSHARE?
Raising awareness of the benefits of using wool fiber to American consumers seems like a daunting task but that is exactly what was happening when the Campaign for Wool held its inaugural U.S. event in Bryant Park in midtown Manhattan on September 27. The event brought 30 head of sheep to the middle of Manhattan to graze within a plexiglas pen. The entrance to the park was carpeted with woven wool carpet and the fountain was drained of water and filled with colorful wool sculptures. Exhibits were set up throughout the park that displayed the many different products that are constructed out of wool, including clothing, bedding, furniture upholstery and carpeting.

Today, about 3% of the carpet and rugs produced in the U.S. are made with wool. According to Bridgette Kelly with the Campaign for Wool, 60% of all the wool fiber imported into the U.S. from the U.K. and New Zealand goes into carpet and rugs. Wool is a useful bi-product of the world sheep market, which primarily focuses on meat. To remain healthy as they mature, sheep must be sheered at least once a year and that animal coat is used to produce wool fiber. Not only is wool a natural product but it’s self-extinguishing when exposed to flame, and it has long-lasting resiliency as a floorcovering fiber.

The type of wool used in floorcovering will always be an import item. While there are sheep here in the U.S., domestic supply only account for 1% of the global market for wool and domestic wool is not coarse enough to be used as a carpet fiber. Tougher weather conditions in the U.K. and in New Zealand have forced the sheep in those countries to evolve to produce a courser hair that is better suited for use in carpets and rugs.

As you might expect, the primary goal of the Campaign for Wool is to increase the price-per-pound that farmers receive for their wool crop by increasing the demand for wool products. The campaign, which kicked off in Europe in 2010, seems to be successful in its mission as the price for carpet-grade wool fiber has risen by almost 20% in the last six months.

Demand for wool carpet fiber was seriously affected in the 1950’s as synthetic fibers like acrylic, nylon, polyester and polypropylene were introduced in the marketplace. Today, thanks to the efforts mentioned above, as well as the sustainability movement toward natural products, coupled with a renewed focus from The Dixie Group on the manufacturing side and CCA Global Partners on the retail side, wool carpet is starting to see more play among upscale retailers. The hospitality sector of the commercial market certainly knows its benefits and it’s an easy upgrade for the retail sales associate who knows how to position it.

SIMILARITIES IN TECHNOLOGY FOCUS
One of benefits of my travels is all the educational seminars that I’m able to attend at the various floorcovering events throughout the year. Last month, two separate groups covered almost exactly the same material even though they service two entirely different markets. The presentations were so similar that it reminded me a little of that movie Groundhog Day.

Both presentations gave advice on how to use technology to manage your business. With limited resources and far too many technology options to choose from, the advice—both to Starnet members and FloorExpo members—was strikingly similar. Manage your online reputation, make sure you have a mobile web presence, and learn how to use a tablet computer as the latest efficiency tool for working on the road. Despite the fact that the two groups of flooring contractors are so different, with Starnet members focused in the commercial sector and the FloorExpo members focused in the multi-family and single-family residential sectors, the advice is still the same.

Managing your online reputation is simple. First, your primary website needs to present your business as a professional, well-organized operation. Websites have become the new “front door” and are often the first impression a prospect has of your organization. In addition, someone needs to be assigned to routinely Google the company’s name as well as monitor any social media sites like Twitter, Facebook or Linkedin, where complaints or negative comments can be posted. Recommendation websites like Angie’s List and Yelp should also be monitored.

In addition to having a normal website, flooring contractors should also have an abbreviated mobile website that allows smartphone and tablet users to quickly access vital information like branch locations, hours of operation, key contact numbers, and services offered.

Tablet computers like the Apple iPad (both groups touted the iPad as the best option) are an extremely portable and effective visual tool that companies should supply their salespeople with as a selling aid and a mobile communications device. If set up correctly with Keynote and a few other inexpensive apps, a tablet computer can be an effective presentation device as well as a great way to help project managers keep projects on track.

If you have any comments about this month’s column, you can email me at kemp@floorfocus.com.

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